Washington, D.C., Sept. 5, 2012 – The Securities and Exchange Commission today charged a nationally syndicated radio personality and financial advice author for spreading misleading information about his “Buckets of Money” strategy at a series of investment seminars that he and his company hosted for potential clients.

The SEC’s Division of Enforcement alleges that investment adviser Ray Lucia, Sr. claimed that the wealth management strategy he promoted at the seminars had been empirically “backtested” over actual bear market periods. Backtesting is the process of evaluating a strategy, theory, or model by applying it to historical data and calculating how it would have performed had it actually been used in a prior time period.

Lucia, who lives in the San Diego area, and his company formerly named Raymond J. Lucia Companies Inc. (RJL) allegedly presented a lengthy slideshow at the seminars indicating that extensive backtesting proved that the Buckets of Money strategy would provide inflation-adjusted income to retirees while protecting and even increasing their retirement savings. However despite the claims they made publicly, Lucia and RJL performed scant, if any, actual backtesting of the Buckets of Money strategy.

“Lucia and RJL left their seminar attendees with a false sense of comfort about the Buckets of Money strategy,” said Michele Wein Layne, Regional Director of the SEC’s Los Angeles Regional Office. “The so-called backtests weren’t really backtests, and the strategy wasn’t proven as they claimed.”

According to the SEC’s order instituting administrative proceedings against Lucia and RJL, they held the seminars highlighting their Buckets of Money strategy in an effort to obtain advisory clients who would be charged fees in return for their advisory services. They promoted the seminars on Lucia’s radio show and on Lucia’s personal and company websites.

According to the SEC’s order, a backtest must utilize actual data from the time period in order to get an accurate result. Lucia and RJL have admitted during the SEC’s investigation that the only testing they actually performed were some calculations that Lucia made in the late 1990s – copies of which no longer exist – and two two-page spreadsheets.

According to the SEC’s order, the two cursory spreadsheets that Lucia claims were backtests used a hypothetical 3 percent inflation rate even though this was lower than actual historical rates. Lucia admittedly knew that using the lower hypothetical inflation rate would make the results look more favorable for the Buckets of Money strategy. These alleged backtests also failed to account for the negative effect that the deduction of advisory fees would have had on the backtesting of their investment strategy, and their “backtesting” did not even allocate in the manner called for by Lucia’s Buckets of Money strategy. The slideshow presentation that Lucia and RJL used during the seminars failed to disclose the flaws in their alleged backtests and was materially misleading.

The SEC charges came to be after the SEC substituted the CPI-U rate of inflation in place of Mr. Lucia’s assumed 3% rate of inflation to Mr. Lucia’s historical performance measures. Mr. Lucia defends the 3% rate as usual and customary in financial planning and contends it more closely represents a retiree’s spending rate which is lower than the population used to obtain the CPI rate.

Although Mr. Hettena’s article is accurate as to the SEC’s filing, he did not mention that Mr. Lucia has provided a video reponse on his website. Nor did he take issue with any content in Mr. Lucia’s response in the video. I would have liked Mr. Hettena to have commented on Mr. Lucia’s reponse.

The interesting thing here is that Mr. Lucia was not selling an investment or security. He was promoting a “strategy”. He was selling a book. Yes, he used his seminars to attract potential clients. But he has always said that each client’s situation is different and there isn’t any one “bucket” model that applies to everyone. Each client would have a different “bucket” strategy.

Furthermore, as far as I can tell by the SEC’s complaint, they have not named a single person who has been harmed by Mr. Lucia’s “misrepresentations”. Without an actual victim, all we have here is an allegation of misrepresentation in a hypothetical illustration without proof that the misrepresentation was harmful.

So, for all we know, Mr. Lucia is accused of using misrepresentations to attract clients who were then provided a sound financial strategy that resulted in the preservation of their wealth throughout their retirement, provided a steady stream of income and allowed them to pass wealth on to their heirs. Should that be grounds for civil charges?